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Thursday March 21, 2019

Washington News

Protect Yourself by Knowing How the IRS Makes Contact

One of the primary ways to protect yourself from tax scammers is to understand the IRS' policies for contacting taxpayers. In IR-2018-12, the Service shared specifics on IRS contact policies.

When & How - The IRS will normally contact taxpayers through the U.S. Postal Service. However, there are some special circumstances in which the IRS may make a home or business visit. These could include an overdue tax bill, a delinquent tax return or to tour a business. However, even in those cases the taxpayer will normally receive a letter prior to the visit.

Telephone Policies - The IRS has policies in place to reduce the risk of taxpayers being confused by tax scammers. The IRS will normally call after sending a letter. It will not demand immediate payment. The IRS also will not threaten arrest from local police, deportation by immigration officers or revocation of one's driver's license. Any of these tactics suggests that the caller is not an IRS employee and is instead a tax scammer. Tax scammers will frequently use false names or phony IRS identification badge numbers. The IRS emphasizes that it does not demand immediate payment or make threats over the phone.

Official IRS Visits - Generally the IRS will send one or more letters or notices by mail prior to any visit. If an IRS employee does make a visit, he or she must provide official credentials. The IRS employee will have an HSPD-12 identification card. You have a right to see his or her credentials. Even if an IRS employee makes a personal visit, he or she will not demand immediate payment. All payments should be sent to the U.S. Treasury.

Email Contacts - The IRS will not normally initiate contact through email. Your initial contact should be through a letter. If you receive an email claiming to be from the IRS, be cautious and do not click on any links. Tax fraudsters will send emails promising information about refunds, filing status or other personal data. These are not official communications from the IRS. The IRS does not use email or text messages to discuss a tax debt or refund.

Private Debt Collectors - Four private debt collection agencies are permitted to make contact with taxpayers to collect overdue tax debts. The IRS starts the process by sending you a letter indicating that the case has been turned over to one of the four qualified agencies. Only one agency will be permitted to contact you. The agency representative must identify himself or herself and all payments must be made to the U.S. Treasury.

White House Developing Phase II Tax Bill

On May 25, White House Director of Legislative Affairs Marc Short conducted a conference call with reporters. He explained the efforts by the White House and House Ways and Means Chairman Kevin Brady (R-TX) to draft a tax bill as a follow-up to the Tax Cuts and Jobs Act. The new bill is expected to be released by September.

Short called the White House plans for this summer an "ambitious agenda." Chairman Brady had previously suggested he wanted to produce a Phase II bill. Brady hopes to make the individual tax cuts permanent, the estate and gift tax provisions permanent and modify retirement savings provisions.

Both Brady and Short have not proposed any revenue offsets for these changes. A Congressional Budget Office (CBO) report projects the cost to extend the individual, gift and estate tax provisions for years 2026 through 2028. The CBO estimated cost is $604 billion for three years of extending these tax cuts.

Short also highlighted other White House priorities. He said work was progressing on the appropriation bills and Senate confirmation of judges and other White House nominees.

Editor's Note: CBO reports indicate the Tax Cuts and Jobs Act will increase the federal deficit substantially over the next decade. A Phase II tax bill faces two obstacles. First, Congress is not likely to pass major tax legislation in an election year. Second, it will be difficult to pass a tax bill that further increases the deficit. Finding political support for a sufficient level of tax increases to pass a revenue-neutral bill will be difficult.

Nonprofit Recommendations for Tax Cuts and Jobs Act

On May 24, 2018, Emory University President Claire Sterk sent a letter to Treasury Secretary Steven Mnuchin. Sterk shared specific requests for Treasury action on the Sec. 4968 Excise Tax, the Sec. 512(a)(7) Unrelated Business Taxable Income (UBTI) on fringe benefits, the Sec. 4960 Tax on Excess Executive Compensation and the Sec. 512(a)(6) UBTI Separate Trade or Business Rules.

Sec. 4968 - A 1.4% excise tax is assessed on net investment income for private universities with over 500 students and $500,000 of endowment per "tuition-paying" student. Sterk suggests that all "undergraduate, graduate, medical and other professional, post-doctoral, executive education, certificate (non-degree) programs" should be counted and all forms of tuition payments permitted. She also suggested that the "assets not used directly in carrying out the institution's exempt purpose" that are excluded from the tax calculation should include operating cash, CRTs and other assets held in trusts, assets held for students, assets used for healthcare and research and assets with donor restrictions.

Sec. 512(a)(7) - Certain qualified transportation benefits may be UBTI. Emory and other large universities may have 20,000 or more employees who use various parking lots, public transit or van pools. Sterk suggests "the amount paid or incurred for qualified transportation fringes and includable in UBTI under IRC Section 512(b)(7) be the lesser of the pre-tax amount withheld under the salary reduction arrangement or the cost incurred to provide the qualified transportation fringe benefits to employees."

Sec. 4960 - If the compensation paid to the top five employees exceeds $1 million, the TCJA assesses a 21% tax on the excess amount. There is an exemption for medical doctors who provide medical services. Sterk suggests the compensation should be defined "in the same way as currently reportable on Form 990 using Form W-2 Box 5 amounts on a calendar year basis." Medical services should be defined by a university. In addition, she suggested, there should be a five year limit for tracking employees who were in the top five compensated persons in prior years.

Sec. 512(a)(6) - A large university may have multiple entities that produce income or losses. The TCJA requires UBTI to be computed separately for each trade or business. The losses in one organization may not offset the UBTI in another entity. Because Emory has over 400 investment entities, Sterk suggests "all investment activities be treated as a single basket in computing UBTI pursuant to Section 512(a)(6), which is a logical extension of the governance approach to managing investment pools."

Editor's Note: This letter is both a cogent set of suggestions and a concise summary of four major areas of TCJA that impact philanthropy.

The IRS has announced the Applicable Federal Rate (AFR) for June of 2018. The AFR under Section 7520 for the month of June is 3.4%. The rates for May or 3.2% or April of 3.2% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2018, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return. Federal rates are available by clicking here.